How To Invest If You're Broke

By Tim Parker | March 22, 2012 AAA
How To Invest If You're Broke

What's the biggest problem that people with lower incomes have with investing? The old saying that it takes money to make money is true, and for those living paycheck to paycheck, there often isn't enough money left over to put towards investing. When you need the money now, thinking about IRAs and the stock market might be so far down your priority list, that you find all of these financial experts a little bit out of touch.

However, the fact remains that if you don't put money away for later years, you will face a catastrophic situation. Someday, you won't be able to work and social security won't be enough to live on, assuming the fund is around in 20 or 30 years. So what can you do? We've put together a few ideas for those people who don't see any available funds for investing.

You Need Money
First, we have to solve this problem of limited funds and the advice isn't new or revolutionary. Something in your life has to go, but it doesn't have to be a big life change. How often do you go to Starbucks for your morning coffee? How often do you go to the nearest fast food restaurant for lunch, and how many times have you hit the bar to blow off a little steam after a hard day at work?

What if you cut out even half of those expenses each month, netting you an extra $50 per month? At the end of a year, you would have $600 to invest. Over 20 years that $600 could become more than $22,000, if you saved that same $600 each year. $600 may not seem like much to get started, but anything is better than nothing, and there are places to put that $600 to that will make a big difference.

DRIPS
DRIPS, or dividend reinvestment plans, allow you to invest small amounts of money into dividend-paying stock, by purchasing directly from the company. Companies like GE, Coca-Cola, Verizon, Home Depot and Johnson & Johnson are just a few of the companies that allow you to make regular purchases of very small amounts of stock, and reinvest the dividends. This can add up to a big investment over time and, as you gain a larger balance, you may consider diverting some of these funds into other investments.

ETFs
ETFs, or exchange traded funds, are financial products that track the performance of a certain sector of the investment market. You can buy as little as one share of an ETF through a broker, and some of these ETFs track the performance of the total stock market, the bond market and many others. Many ETFs also pay a dividend, making a purchase in a fund like the Vanguard Total Stock Market ETF (VTI) an instantly diversified portfolio that also pays a dividend.

Target Date Funds
Target date funds, as the name implies, target your retirement date by changing the percentage of stocks and bonds to assure that your money remains safe as you approach retirement age. Some of these funds require a minimum of $1,000, but they may serve as great products for investors who don't want to manage their portfolio on their own. Use caution when picking a target date fund because of the high fees that some funds charge.

Don't Forget the 401(k)
If you have a 401(k) that will match your contributions, invest there first. Since your company is giving you free money to invest, you should always fund your 401(k) before outside investments.

The Bottom Line
Some of these strategies may require the help of a financial advisor, but most people, if they're willing to give up a few small luxuries, can find small amounts of money to invest into their retirement.

SEE: Job Hunting: Higher Pay Vs. Better Benefits

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